Retirement literacy continues to lag among older employees

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Retirement planning literacy remains low, even among older, wealthier people with good educations who say they know a lot about retirement planning, according to the 2017 RICP Retirement Income Literacy Survey Report produced by The American College New York Life Center for Retirement Income.

A total of 1,244 Americans were given a 38-question survey earlier this year to gauge their financial and retirement planning literacy. To participate, individuals had to be between the ages of 60 and 75 and have at least $100,000 in household assets, not including their primary residence. The survey asked them about everything from estate planning and long-term care planning to safe withdrawal rates from retirement accounts.

Seventy-four percent of all respondents failed the quiz; only 5% of respondents scored 80% or higher. The good news? That is an improvement over 2014, when 81% of respondents failed the quiz.

Jamie Hopkins, retirement income program co-director at The American College, says it didn’t make sense to give this survey to younger demographic groups. It was important to determine how older employees would do on the survey since they are either approaching or already in retirement. They are already in the middle of making these important decisions for themselves, he says.

On the whole, respondents did well on the questions regarding investment returns and inflation.
“This is a group with some financial literacy but doesn’t understand retirement planning very well,” Hopkins says.

Men did better than women when it came to how they did on the survey, with 35% of men passing compared with 18% of women, and people with more wealth and education fared better than those who didn’t have that background. The survey also found that those who work with a financial adviser have lower levels of financial literacy.

There was an improvement in the number of individuals who knew about the 4% rule, which recommends that people take out no more than 4% of their savings each year in retirement. Thirty-eight percent said they knew that $4,000 was the most they could safely withdraw every year if they had $100,000 in their retirement account, according to The American College survey.

Hopkins attributes that improved knowledge to financial advisers and the media talking more about safe withdrawal rates and retirement income over the past three years.

The survey also found that only 34% of respondents knew that a substantial negative investment return at retirement age could have a much bigger impact on portfolio sustainability than a substantial negative return in the years prior to or after retirement.

Individuals who had a comprehensive, written retirement plan were more knowledgeable about these topics than those who didn’t, the survey found.

Hopkins says it is like a chicken and egg scenario. Nobody is certain whether more financially literate people select better advisers or if increased planning makes a person more financially literate.

A good financial adviser can definitely improve financial literacy, he says, because they will make sure the right planning is in place. But many advisers are not doing comprehensive plans. They do everything piecemeal, Hopkins says.

This could be because of adviser preference or training or it could be more company-specific in that they may not offer a full range of products, tools or software needed for comprehensive planning, he says.
“Compensation drives planning. If you don’t make money off planning, you do less planning and focus on product sales. We know that compensation impacts behavior around the world,” Hopkins says.

Retirement income planning and annuities in workplace retirement plans are relatively new concepts, so best practices aren’t yet in place to govern those topics.

Unfortunately, “there is not a retirement insurance product to take care of everything you need in retirement. It would be nice if there was, but there’s not,” Hopkins says. That means that when thinking about retirement, individuals need to look at the whole picture, including having an estate plan, a long-term care plan and a guaranteed source of income in retirement.

How an employer can help

Employers can have a major impact in moving the needle on retirement preparedness, he adds. Many are offering financial wellness programs to get employees to think more about their short-term and long-term finances. Some offer incentives to get their employees to participate.

There is more that can be done, he says, including reviewing the company 401(k) plan periodically and figuring out which features can be added to get more workers to participate. Automatic features, such as auto enrollment and auto escalation, mimic pension plans in that workers don’t have to do anything to be enrolled. Companies could also offer a Roth 401(k) option so that money goes in after tax and comes out tax free at retirement.

“I would like to see more annuity options in the 401(k) market so people would have that option when retiring from a 401(k),” Hopkins says. Nobody is offering qualified longevity annuity contracts in 401(k) plans yet, he says.

“One of the problems we have is there is no real system to educate people financially at an early age. Our schools don’t do that and even our colleges rarely have a financial planning course,” he adds.
The American College survey found that most people are not very financially literate but 66% said they were very knowledgeable.

One takeaway from the survey results is that financial advisers can’t just assume a client understands what they are talking about, even if they say they understand what is being discussed.

“Your life will be better off if you do better planning. That’s what we want,” Hopkins says. “We want retirees to feel secure and happy throughout retirement.”

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